Can the U.S. Beat Canada in the LNG Export Race?

Canada exports much of the energy it produces. Traditionally, most of it went to the United States. The rise of horizontal drilling and hydraulic fracturing reduced demand for Canadian energy, particularly natural gas. This leaves other markets, especially the Asian natural gas market, as logical alternatives.

However, U.S. energy companies also want in on overseas gas exports, and several have successfully obtained permits to export liquefied natural gas, or LNG. Both U.S. and Canadian companies began applying for permits in 2011. U.S. companies look like they'll be the first to export LNG.

Retooling is faster than building from scratch The first U.S. company to receive an export license to countries without a free trade agreement was Cheniere Energy (NYSEMKT: LNG) . The company began building an LNG import facility on the Gulf Coast just before domestic natural gas production soared. Rather than scrap the import terminal, Cheniere moved to convert it to an export facility.

With all the natural gas pipeline infrastructure already in place, an export terminal made sense. Construction had begun, so some capital expenses were out of the way. The Gulf Coast offers easy access to European markets and with the expansion of the Panama Canal, Asian markets will be easier to reach.

Investors seem to have caught the vision. Cheniere's website offers a seemingly endless stream of announcements regarding customers who have signed up for long-term LNG supply agreements. The stock has moved from around $15 a share to just over $55 a share in two years. The company has yet to earn a single penny of profit or deliver a single LNG shipment. Operations at the Sabine Pass terminal should begin in the fourth quarter of 2015 and at the Corpus Christi terminal in 2018.

Dominion Resources (NYSE: D) followed the Cheniere script in converting an LNG import terminal to an export terminal. Dominion's Cove Point facility is located on the Maryland coast, putting it in ideal position to receive gas from the Marcellus and Utica plays and deliver LNG to Europe. The facility continues the process of permits and approvals, but should be operational by late 2017.

In time, the export facility will be spun off as a master limited partnership, Dominion Midstream Partners. Timing and terms of the IPO have yet to be announced. In the meantime, Dominion holds two investment advantages over Cheniere: It's making money and it's paying a dividend.

So who's exporting gas from Canada?In 2011, a consortium of U.S. and Canadian companies formed Kitimat LNG. The partnership received a 20-year export license in 2011 and began the long road of building an LNG terminal from scratch. Over time, the Canadian companies bowed out as did one American concern. Right now, it's a 50-50 joint venture with Apache (NYSE: APA) and Chevron. Since then, Canada has issued other permits with Asian energy companies populating the list.

For Apache, the Kitimat export terminal dovetails its natural gas production in British Columbia with an export market. Specifically, Apache operates the Liard Basin and Horn River Basin. The Liard is under development while the Horn River is in production. Between the two plays, Apache estimates there is 50 trillion cubic feet of natural gas.

What's the problem? For Kitimat LNG and others looking to export LNG from Canada, there are two major hurdles. First, they are building export terminals from the ground up. As Chevron learned in Australia, building from scratch can mean significant cost overruns. This is compounded by Canadian weather, which can limit the construction season.

Second, British Columbia needs expanded pipeline service to Kitimat. To that end, the Pacific Trail Pipeline has been proposed. This pipeline will connect natural gas from Alberta and British Columbia to the Kitimat terminal. It is facing opposition from Indigenous people (called First Nations) who seem bent on protecting their homelands from encroachment. In contrast, U.S. LNG exports, particularly from the Gulf Coast, are already fed by a large network of natural gas pipelines.

And if all that's not enough, there's a major hissy-fit happening over taxation of the LNG exports. The Canadian government wants to tax exports at 7%; energy companies are none too keen on that. How this will play out remains to be seen.

Final Foolish Thoughts Cheniere looks to be the first to export LNG from its Sabine Pass terminal. Dominion should follow in 2017. Both companies enjoy significant infrastructure advantages over their Canadian counterparts. By some estimates, Canada won't export LNG from Kitimat until 2020. In terms of first LNG deliveries, yes, the U.S. likely will beat Canada.

Kitimat offers a shorter voyage to Asia compared to the U.S. Gulf Coast. However, Cheniere and Dominion should export LNG first and this could mean locking up customers before Kitimat LNG opens for business. Suncor recently suspended its LNG export related activities. Perhaps it sees the writing on the wall that Canada has already lost the race for LNG exports.

OPEC is absolutely terrified of this game-changerImagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.